Mike Farrar, chief executive of the NHS Confederation: "Some degree of pay restraint and a fair approach to pay for the next two or three years is going to be vital to allow us the headroom to change the service." Photograph: Linda Nylind for the Guardian

The pay freeze imposed on NHS staff should continue for at least another year, says the chief executive of the NHS Confederation.

Speaking at a Guardian healthcare network fringe event at the Conservative party conference, Mike Farrar said that negotiations should focus on "pay restraint".

"We spend 65p in every £1 on staff, we need to think about a settlement with staff around pay restraint for another short period of time in order for us to have the wherewithal to restructure the business," Farrar said. "We have to have a proper settlement and a proper debate about this, but some degree of pay restraint and a fair approach to pay for the next two or three years is going to be vital to allow us the headroom to change the service."

Farrar also highlighted the need for the health service to rethink its relationship with the public, telling delegates: "The politics of health mask the importance of connecting to the public. We need a new deal with the public on what they expect from healthcare and how we can deliver that."

He added that it will become increasingly important to communicate the true cost of services to people in terms that they can understand in order to create a "care footprint".

Farrar told the debate, about new partnerships in healthcare, that the health service was very "commercially naive" and must evolve to understand the value of working with small and medium-sized businesses.

He added that the NHS "doesn't go out of its way to understand the business models that create the wins, we deal in monopoly money and we have very little understanding of what it takes for a small or medium enterprise trying to develop a product that could help us improve out outcomes. We have got to be much better in terms of understanding the commercial risks and the commercial benefits of working with the NHS."

Farrah was joined on the panel by Stephen Whitehead, chief executive of event sponsor ABPI, who stressed the importance of strong partnerships based on a balance of risk and reward. He told delegates that the pharmaceutical industry had enabled the NHS to survive, by evolving care systems and developing drugs to keep costs down.

He said: "Without the discoveries and developments this industry has brought to the table, the NHS could not survive. Without what we've done, the system couldn't do anything more than sweat a fevered brow."

Whitehead also told delegates that profit should not be considered an "evil word" and that more should be done to encourage NHS staff and the public to work closely with the pharmaceutical industry, through Academic Health Science Networks, in order to integrate research and trials into the healthcare system.

The debate also heard contributions from Dr Clare Gerada, chair of the Royal College of GPs, and Nick Seddon, deputy director at thinktank Reform. Gerada agreed with Farrar on the need for a sensible and frank discussion with staff over pay and what the NHS can afford. However, she warned against constantly striving for innovation without looking back on the history of the sector, telling the audience that "those who go looking for new solutions and innovation never go looking in their own back yard".

Gerada highlighted the importance of learning lessons from long-standing organisations, a point which was echoed by Seddon when he spoke about the need for longer contracts with the private sector in order to let services grow and evolve naturally over time.

Seddon expressed his concern over the clarity of plans to change the configuration of the NHS. He also spoke out about the need to give managers more power to fire staff who perform poorly, and reward and incentivise others. Seddon cited the example of Hinchingbrooke hospital, operated by Circle, and claimed that the company was frustrated by its inability to control the hiring and firing of staff within current national frameworks, something which is holding the hospital back.

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